In between the extremes of private equity and microfinance, the common man is still deprived of money to start a simple business21/02/2008

At the annual ritual of Kolkata Book Fair that has become an impeccable part of the Bengali culture, one would often come across dozens of art students, from the city’s fine arts colleges, selling paintings for pittance of Rs.30-Rs.40. Looking at those creative indulgences, many of which might have got tagged as masterpieces if they were to find a place among scores of art galleries which are raking millions now, one would easily conclude that if there were ever a need to find an ideal example of the quintessential slip between the cup and the lip, India is the ideal sojourn for that. India has often been the land of contrast. A land where many a paradoxes co-exists, be it feminism and female foeticide or over-supply of funds, coupled with lack of funds for new entrepreneurs.

In last few years, no other words probably have got as much mileage the way ‘microfinance’ & ‘private equity’ have entered the mental lexicon of upwardly mobile Indians. So while the legendary Md. Yunus has become a household name, the daily bombardment of news of how private equity investors are making strategic investments in Indian companies and how their crucial involvement is helping India Inc., to have a better foothold in global biz, has also become a routine affair. Assocham forecasts that private equity (PE) funding in India is expected to be $48 billion by 2010. Such forecasts are justified as in 2007 itself, the private equity investments in India have been nearly $17 billion, in a year when the total value of cross-border deals involving Indian companies was worth more than $70 billion. Similarly, microfinance also got much impetus, thanks to the incredible feats of Md. Yunus. In a country where about half of its population still don’t have access to banking, advent of microfinance is a boon. So on one hand, there’s advent of global private equity funds like Carlyle, Blackstone, Warburg Pincus, ChrysCapital & Temasek into India, and domestically too there have been sprouting of such equities like IDFC Private Equity, Infinity Venture Capital Fund, UTI Venture Funds & ICICI Venture, on the other hand, many conventional banks like Bank of Baroda, SBI, ICICI, Yes Bank & even ABN AMRO have been foraying into microfinance. Reports state that by 2010, amount of microfinance in India would be about $3 billion.

So where do we go from here? Well, the halo over both private equity and microfinance is essentially a reflection of the failure of conventional banking in India. For years, industry craved to get the right kind of support system from financial institutions to fund their expansion. While initially it was the tentacles of license raj and small scale industry policies which prevented India Inc. to achieve the critical scale, later it was the paranoia of reducing the Non Performing Assets (NPA) that prevented many banks from increasing their exposure to industry. Add to these, was the domestic high interest rates at a time when interest rates are plunging all across the world. This eventually forced the industry to look towards the private equity partners for assistance. And the rest is history. Today the upper layer of Indian Inc. hardly bothers to run after Indian banks for their funding as they can go for external commercial borrowings, private placement of equity and initial & secondary public offerings. If at all there is need for further funds, the foreign banks with bigger money bags are there to satiate the appetite of India Inc.. Incidentally, today when the likes of Tatas have to raise money, the like of SBI clears a loan of $1 billion for the Tata–Corus deal in just five minutes, lest some foreign bank do it faster. So while private equity has been able to make Indian companies get less worried about funds-in-need, the question is whether it is same for all or only for ones in the upper layers? Are private equity players too following the same trodden path as has been followed by India’s financial institutions, i.e. lend only to those who already have it?

In the book, Creating a World Without Poverty, Muhammad Yunus writes, ‘None of us likes the idea of apartheid. We object when we hear about such a system in any form, anywhere. We all understand that no one should suffer because s/he happened to be born in a certain race, class or economic condition. But our financial institutions have created a worldwide system of apartheid without anyone being horrified by it. If you don’t have collateral, you are not credit-worthy. To the banks, you are not acceptable on our side of the world.’